Just enough Greek debt relief to keep IMF on board

The finance ministers of the eurozone early Wednesday agreed on a new set of funding measures for Greece that was bolder than forecast but nonetheless falls way short of the radical steps needed to put Athens on a sound financial path.

One of the package’s most important consequences will be to allow the International Monetary Fund to continue participating in the Greek financial rescue after the Eurogroup of finance ministers agreed on the initial details of a debt-relief program for the cash-strapped country.

The finance ministers’ deal, reached after an 11-hour meeting, was deemed “a major breakthrough” by Eurogroup President and Dutch Finance Minister Jeroen Dijselbloem. But its only certain impact is that it will allow Greece to meet payments due this summer, thanks to the first disbursement of a €7.5 billion loan tranche next month.

Beyond that, six years after the Greek debt crisis shook the eurozone to its foundations, a Eurogroup deal may once again be seen as a messy compromise mostly aimed at playing for time. Once again, it can be criticized for skirting the radical decisions that would allow Greece to stand on a firmer footing. And once again, it will be seen as a cynical ploy to avoid those decisions because of electoral politics: in this case, postponing major choices until after the 2017 German elections.

Still, the deal is better for Greece than the government of Alexis Tsipras could have expected only two days ago. Contrary to most expectations, it does provide the first steps of a restructuring of the Greek debt load, a key condition for the IMF to keep participating in the country’s rescue.

The debt relief effort will be framed by an overall cap of the country’s debt service. Greece’s “gross financial needs” will remain below 15 percent of GDP in the medium term and 20 percent thereafter, the Eurogroup stated. That was a key demand from the IMF, which in theory cannot participate in a program that doesn’t show a clear path towards debt sustainability for the beneficiary country.

This will be done first by short-term re-profiling of the country’s loans, such as waiving an interest rate hike that should have taken place in 2017 on tranches from the second Greek bailout, agreed in 2012, and making the country take advantage of the low interest rates environment currently benefiting the European Stability Mechanism (the eurozone bailout fund), which funds itself on the markets.

More measures will follow in the medium term, if a review “shows they are needed,” the Eurogroup stated. As for the long term, “the Eurogroup is confident that the implementation of this agreement on the main features for debt measures … will bring Greece’s public debt back on a sustainable path over the medium to long run and will facilitate a gradual return to market financing.”

The plan overall marks progress compared to the simple principle of debt relief formally promised to Greece last year as part of its agreement on tough austerity measures to clinch the country’s third bailout. The first details will allow IMF management to recommend to the institution’s board that it maintains its involvement in the Greek rescue.

The board’s approval, even though Managing Director Christine Lagarde recommends the deal, shouldn’t be taken for granted, however. As the Eurogroup stated, “the possible debt relief will be delivered at the end of the program in mid-2018” (translation: after major elections in Germany and in France).

The tension between the IMF – burned by previous optimistic forecasts on the Greek debt, and regretful of having bent its own rules to get involved in the eurozone crisis — and Germany remains intact. German Finance Minister Wolfgang Schäuble can breathe a sigh of relief that he doesn’t have to present a serious Greek debt relief plan to the Bundestag. And as he wished, the IMF remains involved in the Greek bailout.

So on the face of it, concessions on both sides allowed the can to be kicked down the road once again. But the assumptions behind the scenario remain as fragile as ever — notably the 3.5 percent of GDP primary fiscal surplus target forced on Athens, but deemed “unnecessary” by the IMF.

Granted, the target can be revised in the future — after 2018, of course, as Dijssebloem said.

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Filippo

Some should warn our dear german friends that they are not the only ones who paid for the Greece bailouts and they are not the only ones that have elections sometimes. They are just the only ones whining and complaining all the time about it

Posted on 5/25/16 | 8:57 AM CET

eusebio manuel vestias pecurto vestias

Europe must continue to support a comfortable share of employer and a strong social safety net ECB can spend the cartridges is time to stimulate the economy in the eurozone area

Posted on 5/25/16 | 12:24 PM CET

Corni

Kicking the can down the road is typical for the EU leadership and not of a nature to strengthen the union in the long term. Greeks are simply taking advantage of a weak and shaky leadership that is obvious on all fronts.

Posted on 5/25/16 | 6:16 PM CET

mnemos

Doesn’t anyone else see the possibilities here? The Greek crisis will be drawn out as long as it takes to be able to use it to move another large chunk of sovereignty to Brussels. The only solutions are based on admitting Greek bankruptcy – which would slow integration – or a real bailout which involves significant monetary transfers which will only happen with a transfer of sovereignty. There is a sense in which this is more a function of waiting for the Brexit vote than for German elections. If the UK were out of the picture the objections to transfer of sovereignty could be forced, since they are the only admitted hold out with the leverage to delay anything. After the Brexit vote either the UK will be out of the picture having left, or the UK will have formally ceded its veto which is part of the Cameron deal.